Bookkeeping 101: Bookkeeping Basics for Small Businesses

Bookkeeping is the backbone of a business’s accounting system. It’s possible to manage your own books, and accounting software can help. But using a virtual bookkeeping service may make sense as your small business grows.

Here’s a crash course on small-business bookkeeping and how to get started.

» MORE: What is accounting? Definition and basics, explained

Bookkeeping is the process of tracking your business's finances. It encompasses a variety of day-to-day tasks. These include entering data, categorizing transactions and managing accounts receivable. Ultimately, the insights gained help you better understand your business's health.

» MORE: What is bookkeeping? A small-business owner's guide

Here’s what the bookkeeping process looks like for most businesses.

1. Connect with an accountant or bookkeeper 

Even if you plan to do your own bookkeeping, this should still be your first step. You might only work with your accountant or bookkeeper a handful of times each year. But their industry experience can help with the following:

• Recommending the best accounting software for your business type.

• Ensuring you set up your chart of accounts correctly.

• Preparing and filing your tax returns to maximize small-business tax deductions. 

» MORE: How to find the right small-business tax advisor

2. Choose a system for entering transactions

The entry system you choose impacts your bookkeeping processes. You have two options: single entry and double entry.

Single-entry accounting. This method records all your transactions once, as an expense or as income. It’s straightforward and suitable for businesses without significant inventory or equipment.

Double-entry accounting. This method enters every transaction twice, as both a debit and a credit. Your business’s books are balanced when the debits equal (or cancel out) the credits. Although this method is more complicated, it can prevent bookkeeping errors.

We recommend most businesses use double-entry accounting. That’s because it counts equity, assets and liabilities — on top of expenses and income. This gives you a more accurate financial snapshot of your business.

Our top accounting software picks typically use double-entry accounting.

3. Choose an accounting method

You’ll also choose between cash- or accrual-basis accounting. This will impact how your reports look.

Cash-basis accounting. This method records transactions when money changes hands. It doesn't record invoices or your company's outstanding bills until you’ve been paid them.

Accrual-basis accounting. This method records all outstanding invoices and bills. It doesn’t matter if no funds have changed hands yet.

Accrual basis aligns more with generally accepted accounting principles. We’d recommend it for most businesses.

4. Set up your accounting software or spreadsheet

Many business owners start with a spreadsheet. This might get the job done at first. But accounting software is a better long-term solution.

Accounting software makes it easier to centralize your records and run reports. If cost is a factor, there are lots of free accounting software options.

Once you choose a product, you’ll enter your business’s information and connect your business bank accounts. You can also give your accountant access to the software. This allows them to make necessary adjustments and check for errors.

5. Track financial statements and documents

Bookkeeping requires accurate recordkeeping. That means recording transactions and saving bills, invoices and receipts.

Most accounting software options let you take and store photos of receipts. They also pull in your bank and credit card transactions, so that you don’t have to add them manually. This way, you can quickly reference them in case of an audit or accounting error.

6. Sync with your payroll software

Some businesses process payroll within their accounting software. Others subscribe to separate payroll software. Either way, make sure your payroll transactions flow directly into your accounting software.

7. Manage transactions

Sticking to a schedule is a big part of bookkeeping. At the end of each month, confirm your software has categorized your transactions correctly. Then, you’ll reconcile them to make sure they match your bank statement.

It’s also a good idea to pop into your accounting software weekly to look for hiccups. This habit can help you stay on top of invoices, too. Do you owe a vendor money? Is one of your client’s payments overdue? It’s better to catch these oversights sooner than later to maintain healthy cash flow.

8. Handle accounts receivable and payable

Accounts receivable involves sending estimates and invoices, plus keeping track of due dates. This ensures you get paid on time.

Most accounting software has invoicing features, like automated payment reminders. Or, you may opt for standalone invoicing software.

You also need to pay your own bills on time to avoid late fees and maintain a solid reputation. Categorize expenses that you haven’t paid yet as accounts payable.

Accounting and bookkeeping apps reduce a good deal of manual data entry. These make it entirely possible to do your own bookkeeping.

However, bookkeeping will take time out of your week. And catching up can be difficult if you fall behind on reconciling transactions or tracking unpaid invoices. Be sure you have the resources before committing to handling it yourself.

Even if you do your own books, you should still have an accountant. Check in with them at least every few months. They can help catch mistakes and make sure everything is accurate.

Hiring a part-time or full-time bookkeeper gives you daily access to their expertise. It allows them to become more familiar with your finances, processes and accounting tools, too.

If you go this route, look for a bookkeeper that:

• Has the technical knowledge you need.

• Knows your industry — or is ready and willing to learn those intricacies.

• Is passionate about the work they do.

• Fits your company’s culture and larger mission.

Of course, hiring a bookkeeper can be expensive. An online bookkeeping service may be a more cost-effective option.

With this type of service, you can communicate completely by email or phone. The responsibilities a service can handle will vary. Be sure to discuss the scope of work and compare options to find the right fit.

» Need more than a bookkeeper? Consider a fractional CFO.

Without bookkeeping, it would be difficult to get an accurate picture of your business’s financial health. Here are some other reasons why the process is crucial for small businesses:

• Separates business and personal finances. Bookkeeping can help ensure these lines don’t cross. This can be important for avoiding personal liability for any business debts or issues.

• Identifies mistakes early. Managing transactions and reconciliation avoids financial issues later on.

• Simplifies business finances. Good books streamline tax processes. Working with tax professionals can help you save money.

• Keeps an eye on business financial health. You can identify ways to improve or change processes.

• Organizes documents and records. This can simplify processes such as applying for a business loan or buying new equipment.

» MORE: Find the best accounting software for your business type

NerdWallet writer Whitney Vandiver contributed to this article.